Tax Update - 19 November, 2012

1. General news

1.1. Response to the proposal for a Scottish land and building transaction tax

On 1 November responses to the recent consultation on the proposed Scottish land and buildings transaction tax were published.

The Scottish Parliament will have new financial powers from April 2015 over taxes on land and property transactions and on disposal to landfill. This consultation was the first of three dealing with these devolved tax powers and is focused on introducing a land and property tax to replace the current UK Stamp Duty Land Tax (SDLT) system. Key changes proposed were:

• Changes to the way SDLT charges are calculated, with the proposed introduction of a progressive tax structure (so that the tax, like income tax, is only paid at the applicable rate(s) on the amount within each threshold).
• Changes to the administration of SDLT and how it links to land registration, with proposed new online arrangements.

A number of other changes have also been proposed, for example the scope of reliefs and lease charges for residential property.

www.scotland.gov.uk/publications/2012/10/8469/1

2. IHT and trusts

2.1. IHT – deposit account in joint names of deceased and her son

The First-tier Tribunal has recently considered the case of John Matthews (Executor and Trustee of the estate of Mrs Mary Jean Matthews Deceased) v HMRC (TC02329).

The late Mrs Matthews invested approximately £95,000 in a joint account with her son John Matthews in 1999. The words `Either Signature' were included in the special instructions for operation of the account. Mr Matthews accepted that those words indicated that either he or his mother could withdraw monies from the account without the signature of the other being required. During the period from 1999 to the date of Mrs Matthews' death in 2007 there were no withdrawals and the only monies added to the account were in respect of interest and bonuses.

Mr Matthews and his mother each included one-half of the interest on their tax returns.

Mr Matthews claimed that his mother intended to make an immediate gift of one-half of the monies in the account on the date it was opened and he could have used the whole of the monies for whatever purpose he wished. However he was unable to produce any evidence in support of his claim.

HMRC contended that the whole balance standing to the credit of the account at the date of Mrs Matthews' death was taxable under section 5(2) of the Inheritance Tax Act 1984 which provides:

"A person who has a general power which enables him, or would if he were sui juris enable him, to dispose of any property other than settled property, or to charge money on any property other than settled property, shall be treated as beneficially entitled to the property or money' and for this purpose "general power" means a power or authority enabling the person by whom it is exercisable to appoint or dispose of property as he thinks fit".

Alternatively, HMRC submitted that there had been a gift with reservation.

The judge concluded that the account was a joint account and there was no tenancy in common. On that basis he decided in favour of HMRC:

"I accept the conclusion to which Avery Jones came in Sillars on the same point. He said at [13], adapting his words to the instant case:

"While the Deceased's power over the account was not a general power in the ordinary sense, it fits the definition. The Deceased was able to dispose of the balance as she thought fit ... The joint account was plainly not settled property ... I do not accept that if the Deceased had needed more than one-[half] of the initial balance the excess would have been a gift by [Mr Matthews]. It is much more realistic to regard the Deceased as having power to deal with the Account as she thought fit. Whether or not s.5(2) can produce cases of double taxation does not arise in this appeal and on the facts found this is not a case where double taxation could arise. I do not consider that [Mr Matthews] had any such general power".

In Sillars Dr Avery Jones went on to deal and agree with the Commissioners' argument relating to gift with reservation. Again, I propose to follow his decision in that behalf. He said at [14] once more adapting his words to the instant case:

"The account was held beneficially as joint tenants. The gift was of a chose in action consisting of the whole account, not [one half] of the initial balance. It follows that possession and enjoyment of the account had not been assumed by [Mr Matthews] because the Deceased was still entitled to a share; and nor had it beenenjoyed to the exclusion of the Deceased and of any benefit to her as all benefits from the account were enjoyed by the Deceased"."

http://www.bailii.org/uk/cases/UKFTT/TC/2012/TC02329.html

3.1. Real Time Information (RTI) reporting

HMRC has issued the following update:

In April 2013 employers will start sending PAYE information in real time. This means it must be sent 'on or before' the date the payment is made. This will save time for the vast majority of employers as it means:

• reporting is integrated with their normal payroll process;
• separate end of year PAYE return (forms P35 and P14) are no longer needed;
• starter and leaver information is reported as part of the routine reporting rather than separate submissions.

HMRC has been working closely with stakeholders who have demonstrated that in a small number of cases reporting information in real time would be difficult or impossible. To make reporting easier for employers in these situations HMRC will allow extra time in some cases.

There will be up to seven days to report PAYE information where:

• payments are made on the day of work which vary depending on the work done, where it is impractical to report in real time - such as:

• payments are made to employees for whom employers do not have to maintain a Deductions Working Sheet (form P11).

There will also be extra time to report payments of benefits and expenses subject to Class 1 National Insurance contributions but not taxed under PAYE. These can be reported the next time the regular payroll is run, or 14 days after the end of the tax month the payment was made in, whichever is earlier. Notional payments can already be reported to the same timescale.

In addition, HMRC will issue further guidance on the reporting of ad hoc advances of pay and a statement of operational practice on reporting of payments made by expat employers and those operating share schemes.

Notional payments could arise from share schemes. They arise where there is no transfer of money from the employer to the employee. These include certain payments by an intermediary of an employer, certain payments by non UK employers, or payment made using special types of income. For example, when an employer awards shares to an employee for less than their market value, this may be a notional payment. HMRC guidance on notional payments can be found at: http://www.hmrc.gov.uk/payerti/payroll/special-pay/non-cash.htm#1 . Under RTI the revised reporting requirements for these types of payment will be the earliest of:

• the time that the employer operates PAYE on the payment; or
• 14 days after the end of the of the tax month in which the payment was made – e.g. for a payment made between 6 July and 5 August, this would be 19 August.

www.hmrc.gov.uk/news/rti-paye-returns.htm

HMRC has published a technical note and draft regulations concerning the above, for comment by 11 January 2013. In addition to the above RTI points, some non-RTI points are covered in these documents. Those non-RTI point are:

• From April 2012 the Simplified PAYE Deduction Scheme (SPDS) was closed to new users, and it was intended that the scheme would be closed completely from April 2013. SPDS will remain open for 2013-14, for existing users who are care and support employers and wish to file on paper only. The amendment to regulation 34 for 2013-14 therefore ensures that only care and support employers are eligible to use the SPDS from April 2013. It should be noted that SPDS will not be available from April 2013 for users who employ a nanny or other domestic staff not coming within the classification of care and support staff.
• Amendments will be made to the tax code to be applied to one-off lump sum payments arising from commuting small pensions. Instead of pension providers having to operate the emergency code (non-cumulative) on such payments, they will operate the basic rate code (also non-cumulative) from 6 April 2013.

www.hmrc.gov.uk/drafts/draft-technote.pdf

www.hmrc.gov.uk/drafts/draft-leg-paye.pdf

www.hmrc.gov.uk/drafts/draft-cis-regs.pdf

www.hmrc.gov.uk/drafts/draft-leg-nics.pdf

4. Business tax

4.1. SDLT and subsales

The Upper Tribunal has confirmed the decision of the First-tier Tribunal that no SDLT was chargeable on the 2006 acquisition of the leasehold interest in the Dickens and Jones building in Regent Street from Legal & General Assurance Society Ltd (L&G) by a company (DV3 Regent Street Ltd - DV3 RS Ltd) and a partnership (DV3 RS Limited Partnership - DV3RS LP) using the SDLT subsale and partnership rules in FA03 s44, s45 and schedule 15.

A brief summary of the format in which the transaction took place is as follows:

On 24 October 2006 DV3 RS Ltd entered into a contract to acquire from L&G a leasehold interest in 224-244 Regent Street London. The purchase price was £65,100,000. Completion was to take place on 4 December 2006 by the completion of a transfer (a form TR1) from L&G to DV3 RS Ltd.

However on 30 November 2006 a BVI partnership, DV3 RS LP entered into a contract to acquire the lease from DV3 RS Ltd. The purchase price was £65,100,000. Completion was to take place on 4 December 2006 (the same date as that for the first contract) by the completion of a transfer (a form TR1) from DV3 RS Ltd to DV3 RS LP.

DV3 RS LP's members were DV3 RS Ltd (which had a 98% interest in its income), DVS Regent Street No.2 Co Ltd, DV3 Regent Street (General Partner) No.1 Co Ltd, DV3 Regent Street (General Partner) No 2 Co Ltd, and the trustees of the Equity Reversions Unit Trust No.1 (the Unit Trust). The interest of each of the partners other than DV3 RS Ltd was ¹/₂%.

100% of the issued share capital of DV3 RS Ltd and each of the other DV3 companies was owned by DV3 Limited. DV3 Limited owned 99% of the units in the Unit Trust. In other words DV3 Ltd had what was effectively a 100% interest in both DV3 RS Ltd and DV3 RS LP.

In the event the contracts (1) between L&G and DV3 RS Ltd and (2) between DV3 RS Ltd and DV3 RS LP, were completed on 5 December 2006, with contract 1 being completed immediately before contract 2.

The taxpayer contended FA03 s45(3) operated to disregard the substantial performance under the first contract for SDLT, and by virtue of the operation of the partnership rules in FA03 Sch15, the consideration to be taken into account for the partnership transaction for SDLT purposes was nil.

HMRC's contention before the Upper Tribunal was that:

• As s45(3) disregarded the substantial performance of the first contract, DV3 RS Ltd never actually acquired the property for SDLT purposes, with the result that the partnership rules (in particular Sch15 para 10) could not apply.
• As the first contract was effectively disregarded DV3 RS Ltd could not be regarded as the vendor under the secondary contract for s45(3) purposes.

The Upper Tribunal judge (Justice Henderson) considered the relationship between the secondary contract in s45(3) and Sch 15 para 10. Having considered the words in s45(5A(b)) (which in relation to group relief say "other references in this Part to the vendor shall be read where the context permits as referring either to the vendor under the first contract or the transferor)" in conjunction with the references to transferee in s45(3)(a), he could only conclude that the vendor for the secondary contract was DV3 RS Ltd.

In agreement with the taxpayer, he also considered that the references in the FA(No 2) 2005 Act amendment to the drafting of s45(3) to close a loophole in the legislation concerning the use of alternative property finance, meant that the taxpayer's interpretation of the legislation was the same as Parliament's, as on HMRC's interpretation the amendment would never have been required.

In conclusion he noted that:

• This result is no doubt one that Parliament would not consciously have intended had the facts of the present case been drawn to its attention.
• The partnership provisions in Part 3 of schedule 15 have undergone considerable evolution since their introduction in 2004. If the transaction had taken place four months earlier, or a few months later, there would have been a SDLT charge on consideration of £65.1m due in the former case to the earlier operation of the partnership rules and in the latter case to the SDLT anti-avoidance in s75A-C. Thus advantage from the form of transaction undertaken in this case was only available for a few months and reflected a period of considerable uncertainty on how the legislation dealt with partnership transactions.
• There were some minor points on which he disagreed with the First-tier Tribunal, but as these were pure questions of law which did not affect the outcome of his decision, he declined to comment further on these differences.

At this stage it is not known whether the case will be appealed by HMRC.

www.bailii.org/uk/cases/UKUT/TCC/2012/399.html

The judge put a lot of stress on what he described as the technique of limited deeming employed in FA03 s45. The section creates the concept of a secondary contract but only for limited purposes. The secondary contract retains at least some real features. The judge stressed the fact that the section clearly envisages the actual completion or substantial performance of the secondary contract notwithstanding its partly fictional status. Therefore you must have recourse to the actual facts to determine when the secondary contract is completed (or substantially performed). The only aspects of the secondary contract that the draftsman found it necessary to specify were the identity of the purchaser and the consideration. Apart from this, all other aspects of the secondary contract including, crucially, the identity of the vendor, were intended to reflect as closely as possible the actual transfer of rights. The reason why this was not spelled out in s45 was that it had no bearing on the limited purpose for which the secondary contract was brought into existence, which was to avoid a double charge to SDLT.

This finding was crucial because it inevitably led to the conclusion that the vendor under the secondary contract could only be the company as the company and the partnership were the only parties to the sub-sale. Once the judge reached this conclusion there was nothing to stop the provisions in FA03 Sch 15 para 10 from applying in setting the chargeable consideration. HMRC's case was wholly built on the argument that, because s45 requires the original contract to be ignored, the company was treated as never having acquired the property and hence Sch15 para 10 was never engaged. This was comprehensively demolished by J Henderson's analysis of the true nature of the secondary contract and the limited deeming in s45.

The First Tier Tribunal had found that the secondary contract was a tripartite contract involving the original vendor, the company and the partnership. The judge concluded from a close analysis of s45(5A) that the secondary contract would not normally be a tripartite contract and the transferor will normally be the actual transferor and no-one else. He also took considerable support from the end piece to s45(3) which, in his view, showed that Parliament was concerned about the inter-action between s45 and s73. This would not have been an issue if HMRC's contention was correct.

His conclusion can be summarised very succinctly in the following quote:

"The sub-sale by the company to the partnership forms part of the real state of affairs and I can find nothing in the statutory hypothesis which requires it to be displaced"

It is also suggested in the judgment that that this planning would have had a limited window as it would be defeated by s75A (egislated in 2006). The judge does not comment directly on this (he was not being asked to rule on s75A) but does not dissent from it. It is, indeed, more likely that, as a result of this judgment, s75A would apply to sub-sale schemes. An argument that has been used has been that, because s45 says to ignore the original contract, there is not "a number of transactions" as required by s75A. Ironically, this judgment would necessarily doom such an argument to failure as it relies on exactly the argument that HMRC tried and failed to make in this case. It is worth noting that the sub-sale planning that emerged after s75A came in was the planning based on sharia compliant financing. This relied on a specific exemption within s75A(7). This planning has since been blocked by changes to s45 and the definition of a financial institution.

A final point that is worth mentioning is one that was dealt with by the judge pretty swiftly but is quite important. The FTT had expressed some doubts about whether the transaction was genuinely a sub-sale because the second contract completed immediately after, rather than simultaneously with the first contract. This was not pursued at FTT as both parties had agreed that it did meet the requirements of being a sub-sale. However, in order to put the matter beyond doubt, J Henderson rules unequivocally that it was a sub-sale within the meaning of s45.

4.2. Test claimants in FII Group Litigation

The CJEU has issued its judgment on the following five questions referred to it by the High Court in April 2011 (case C-35/11. Further questions have been referred by the UK Supreme Court (case C-362/12). The questions considered in case C-35/11 and the relevant responses were:

1. Do the references to "tax rates" and "different levels of taxation" at paragraph 56 of the [judgment in Test Claimants in the FII Group Litigation]:

The CJEU commented that the reference to tax rates and different levels of tax relates both to the applicable nominal rates of tax and to the effective levels of taxation. The effective level of taxation may be lower than the nominal rate of tax by reason, in particular, of reliefs reducing the tax base. As regards any difference between the nominal rate of tax and the effective level of taxation to which the resident company paying dividends is subject, the exemption and imputation methods do not immediately cease to be equivalent as soon as exceptional cases exist in which nationally-sourced dividends are exempt although the profits out of which those dividends have been paid have not been subject in their entirety to an effective level of taxation corresponding to the nominal rate of tax.

According to the High Court, in the United Kingdom the effective level of taxation of the profits of resident companies is lower than the nominal rate of tax in the majority of cases. It follows that application of the imputation method to foreign-sourced dividends as prescribed by the legislation at issue in the main proceedings does not ensure a tax treatment equivalent to that resulting from application of the exemption method to nationally-sourced dividends.

As a result, Articles 49 TFEU and 63 TFEU preclude legislation of a Member State which applies the exemption method to nationally-sourced dividends and the imputation method to foreign-sourced dividends where:

• the tax credit to which the company receiving the dividends is entitled under the imputation method is equivalent to the amount of tax actually paid on the profits underlying the distributed dividends; and
• the effective level of taxation of company profits in the Member State concerned is generally lower than the prescribed nominal rate of tax.

2. Does it make any difference to the Court's answer to Questions 2 and 4 of the reference in [Test Claimants in the FII Group Litigation] if:

The CJEU held it did not make a difference in either case.

3. In the circumstances described in Question 2(b) ..., does the company paying the ACT have a claim for the repayment of the tax unduly levied (San Giorgio ...) or only a claim for damages (Brasserie du Pêcheur and Factortame ...)?

The CJEU held that there was a right to a claim for unduly levied tax. More specifically it commented that where a parent company in a group tax scheme such as the group income election had been compelled to pay ACT on the part of the profits from foreign-sourced dividends, it was entitled to unduly levied tax in so far as it exceeded the additional corporation tax which the Member State in question was entitled to levy in order to make up for the lower nominal rate of tax to which the profits underlying the foreign-sourced dividends were subject compared with the nominal rate of tax applicable to the profits of the resident parent company.

4. Where the national legislation in question does not apply exclusively to situations in which the parent company exercises decisive influence over the dividend paying company, can a resident company rely upon Article 63 TFEU ... in respect of dividends received from a subsidiary over which it exercises decisive influence and which is resident in a third country?

The CJEU held that the company as entitled to rely on article 63 (free movement of capital) to make claims as a result of group relationships traced through non-EU countries.

5. Does the Court's answer to Question 3 also apply where the non-resident subsidiaries to which no surrender could be made are not subject to tax in the Member State of the parent company?

The CJEU determined that it did not.

http://curia.europa.eu/juris/document/document.jsf?text=&docid=129661&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first∂=1&cid=196298

4.3. SEIS company qualifying conditions

As introduced in Finance Act 2012, the new ITAs257DG(2) requires that the SEIS issuing company must not be under the control of any other company in period A. Period A begins with incorporation and ends immediately before the third anniversary of the date on which the SEIS shares are issued (s257AC(2)). This is different to the EIS requirements where the corresponding control period runs from the date of issue of the EIS shares (not incorporation) to immediately before the third anniversary of either the share issue or the date trading commenced if later. Thus companies set up by corporate formation agents (which use corporate entities to hold initial subscriber shares) are unsuitable for SEIS purposes. We have received a copy of a note from HMRC discussing the possibility of corrective legislation in this respect:

There are a number of points on this issue:

On the implicit suggestion that HMRC might choose to limit the circumstances in which the legislation is applied strictly, I'm afraid we have no scope to do that. We're legally obliged to apply the legislation as it stands, irrespective of whether that gives an unfortunate result. HMRC has some limited discretion about how we apply legislation where a particular piece of legislation is capable of being interpreted in more than one way, but I don't think that's the case here. If this legislation works in an unfortunate way then the solution is to change the legislation in a Finance Bill which HMT and HMRC will consider if we have evidence that it is causing significant problems in practice.

At present, it's not clear to us that "most businesses" will in fact use a formation agent; our experience is that significant numbers of new incorporations are established directly by their founders via the Companies' House website, whilst others are set up by the founders' accountants or lawyers, which doesn't necessarily involve the use of a corporate shareholder to start with. As Christine says in her separate e-mail, we will be looking to see how many businesses fail completely to qualify as a result of this bit of legislation, but at themoment we haven't had sufficient applications to be able to determine whether this is a real problem rather than a theoretical one. Actual stats from your members would no doubt be informative.

Interim practical measures pending any legislation solution:

a. Don't set companies up with a controlling corporate shareholder.

b. If an existing company hasn't started trading by the point at which the SEIS1 is to be submitted, then there should be no problem with just shutting down the non-qualifying company and starting a new company, even if the investors in both companies are to be exactly the same.

c. If an existing company is already trading and is now seeking its first investment from third party investors who will the first people to seek SEIS relief, then I think it should be possible to transfer the trade to a new company and to arrange that investment so that the new investors don't lose their relief under S257FP. S257FP only bites if the investors seeking relief are people who previously owned more than a half interest in the trade.

d. If none of the above is possible, make do with 30% income tax relief; CG deferral and disposal reliefs; scope for share loss relief on up to 70% of investment; and inheritance tax business property relief.

5. VAT

5.1. Removal of the VAT registration threshold for businesses which are not established in the UK

HMRC's Brief 31/12 outlines that from 1 December 2012, non-established taxable persons (NETPs) will no longer be able to benefit from the UK VAT registration threshold. They will be required to register for UK VAT when they make their first supply of goods or services here regardless of the value.

NETPs who are already making supplies here will be required to register for UK VAT with effect from 1 December 2012.

http://www.hmrc.gov.uk/briefs/vat/brief3112.htm

5.2. TOGC treatment of property transactions following the Robinson Family Ltd decision

HMRC has issued Brief 30/12 following the First-tier Tribunal's decision in the case of the Robinson Family Limited ([2012] UKFTT 360 (TC), TC02046). It will not be appealing the decision. An extract from the Brief is set out below.

In the light of the Tribunal's decision in the Robinson Family case, HMRC accepts that the fact that the transferor of a property rental business retains a small reversionary interest in the property transferred does not prevent the transaction from being treated as a TOGC for VAT purposes. Provided the interest retained is small enough not to disturb the substance of the transaction, the transaction will be a TOGC if the usual conditions are satisfied. In this context, the Tribunal's decision does not as such alter any other areas of HMRC's policy on TOGCs, but we are reviewing the policy on whether the surrender of an interest in land can sometimes result in a TOGC. HMRC is also reviewing whether properties which are used in a business other than property letting are affected by this change of policy.

The second bullet point in paragraph 6.3 of Notice 700/9 should be ignored, as we now accept that the creation of a new asset (a lease or sub-lease) and the retention of the original asset (the freehold or a superior lease) is not automatically incompatible with TOGC treatment. The Notice will be updated in due course.

HMRC will accept that a reversion retained by the transferor is sufficiently small for TOGC treatment to be capable of applying if the value of the interest retained is no more than 1 per cent of the value of the property immediately before the transfer (disregarding any mortgage or charge). Where more than one property is transferred at one time, this test should be applied on a property by property basis rather than for the entire portfolio.

If the interest retained by the transferor represents more than 1 per cent of the value of the property, HMRC will regard that as strongly indicative that the transaction is too complex to be a TOGC.

We accept there are situations where in the past customers did not regard a transaction as constituting a TOGC because of the guidance referred to. In some cases a building would have been sold where an option to tax had been exercised, and the relevant VAT charged and accounted for. SDLT would then have been payable on the VAT-inclusive amount. There are two questions to address where customers wish to retrospectively claim TOGC treatment on account of the Tribunal's decision in the Robinson Family.

Firstly, there is the difficulty that the relevant notification that an option to tax will not be rendered ineffective, will not have been given by the buyer to the seller. This is a legal requirement in articles 5(2A) and 5(2B) of the VAT (Special Provisions) Order 1995, and it is referred to in paragraph 11.2 of Notice 742A: Opting to tax land and buildings.

Provided the parties can satisfactorily evidence that Article 5(2B) did not apply at the time of the transaction and thus the requisite notification could have been given, we will accept that the legal requirement has been complied with.

Secondly, there is the question of whether an adjustment can be made to the SDLT already paid. We are considering this point and will provide further guidance on it soon.

http://www.hmrc.gov.uk/briefs/vat/brief3012.htm

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.